Oil rises on Middle East supply worries

Brent crude rose above $103 a barrel on Tuesday, up for a second day on concerns over supply disruption from Libya and worries that political turmoil in Egypt could hit oil flows from the region.

Brent crude futures for August delivery were up 50 cents at $103.50 a barrel by 1336 GMT after rising 0.8 percent the previous day. U.S. crude futures for August were 48 cents higher at $98.47 per barrel after rising more than 1 percent on Monday.

Oil output in Libya has fallen by a third after protesters shut several oilfields and anti-government demonstrations in Egypt have raised concerns about the stability of the whole region.

Prices were also supported by data on Monday from the Institute for Supply Management that showed U.S. manufacturing activity grew in June.

"It's a mixture of supply worries and general market sentiment with yesterday's ISM index in the U.S. better than expected," said Carsten Fritsch, oil analyst at Commerzbank in Frankfurt.

He added that investors were taking the opportunity to buy oil at relatively low prices after three consecutive quarters of falls, the longest such period since 1997-1998.

Analysts also pointed to the increase in refining capacity due to come on stream as bullish for oil.

"Over 2 million barrels per day (bpd) of global refinery capacity will return by late July on top of the 2.5 million bpd that has returned over the past four weeks, providing ample opportunity for runs to rise," Morgan Stanley said in a note.

SPREAD NARROWS

Brent's premium to U.S. crude narrowed to its lowest since January 2011 at $4.54 a barrel, as severe flooding disrupted Canadian oil supply to the United States.

Canada resumed operation on Monday at a part of a major pipeline in Alberta as weather improved.

Some analysts said the spread was too narrow and could widen to cover costs to transport oil from Cushing, Oklahoma, the delivery point for WTI, to other parts of the United States.

Brent's premium to WTI could also increase due to tighter supply in the North Sea grades from which the Brent price is calculated, JBC Energy said in a note to clients.

"The current weakness in the Brent market could turn if the expected North Sea maintenance through September materialises to squeeze supply of the four grades which make up the marker, while continued arbitrage interest from South Korea may further tighten availability."